Mention retirement and most federal employees start wondering:
- “Where are we going to vacation first?”
- “Should I jump on the pickleball bandwagon…or get back into golf?”
- “What if we move closer to family?”
All excellent questions! But there are four bigger, more pressing questions you should tackle first. They are:
- What should I do with my Thrift Savings Plan (TSP)?
- What about my Federal Employees’ Group Life Insurance (FEGLI)?
- What about my enhanced annuity?
- What about my survivor benefit election?
Answering these questions is the subject of this blog post (and companion video).
1. What should I do with my TSP?
Of course, you can always leave your money in your Thrift Savings Plan (TSP). But there are reasons you might want to move your money into an Individual Retirement Account (IRA), the main ones being control and flexibility.
At Christy Capital Management, we like to help clients create a comprehensive “financial blueprint.” This document is useful for projecting what your retirement might look like, given different factors.
One scenario we look at imagines you and your spouse living into your 90s. In this scenario, we leave your money in your traditional TSP. We want to see, first, if you’ll have enough money, and second, what your account potentially could look like 20 years from now, given the money you have in that account, and calculating different rates of return.
We also do a “tax-planning” scenario where we ask, “What would happen over time if we shifted some of your traditional TSP money to a Roth account? How would that affect your financial situation, say, in your 80s?
This kind of contingency planning using a client’s financial blueprint makes a big difference as we consider all these different planning scenarios.
It’s worth noting that within your TSP, you cannot do Roth conversions. What this means is whatever Roth you’ve accumulated while working, once you are retired, that’s the only Roth you can have in the TSP.
You can’t go in every year and take $50,000 from your traditional TSP and move it over to Roth. That’s just not allowed. But using your financial blueprint, we can show you the benefits of doing some strategic Roth conversions.
Those are the kinds of things we look at when helping you answer the question, “What should I do with my TSP money?”
Working with a professional who understands the ins and outs of federal benefits can make resolving this question much less stressful.
2. What about my Federal Employees’ Group Life Insurance (FEGLI)?
Basic coverage is your salary rounded up to the nearest 1,000 (with $2,000 added to that figure). This coverage is the same price for your entire career, and it only changes at retirement. Choose “option B” and you can get coverage up to five times your salary; however, every five years option B goes up in price.
Chances are you’re around 50 years old (or more), and maybe you’ve seen that FEGLI “option B” life insurance is starting to get expensive. By 60 years old, it can be really expensive. At retirement, you’ve got to make a selection. What do I want to do with it? Keep it or drop it?
This is another one of the scenarios we look at in our “financial blueprint” exercise: “What happens if I die? Will my spouse receive enough death benefit to make it into their 90s?”
The simple fact is: If you need life insurance, then you need it, and you have to figure out the best way to get that need covered. However, that doesn’t necessarily mean that FEGLI is the best way to cover it for you.
Term life insurance is an option, and there are also different types of permanent insurance available outside of FEGLI. The newer type of life insurance that’s permanent is called index universal life insurance. It has a death benefit that doesn’t run out.
Again, if you need coverage then you need to get it, but you always want to get several quotes. You need to research the question, “Would an outside policy provide better coverage for me and my family than FEGLI can do–and at a lower cost?”
To recap: FEGLI gets more expensive every five years–at least “option B” does–and it gets very expensive at retirement. So, at retirement, what are you going to do with FEGLI? Keep it? Get a different policy? Do you even need life insurance? This question demands an answer.
3. What about my enhanced annuity?
Are you planning to retire around your 62nd birthday? I ask because at age 62–assuming you have 20 years or more of federal service–you qualify for an enhanced annuity.
Instead of taking your “high-3” average salary times 1%, the government takes your “high-3” times 1.1%…times your number of years of service. If you have 20 years of service, that amounts to a 10% bonus!
In short, if you’re thinking of retiring before age 62, you may want to think hard about waiting. If an annuity is good, an enhanced annuity is even better!
Again, understanding all your options is important to creating the best possible retirement.
4. What about my survivor benefit election?
When it comes to your survivor benefit elections, you have a few choices. You can pick 0% and leave nothing to your surviving spouse. You can pick the 25% option and leave a quarter of your pension. Or, you can leave half of your pension to your surviving spouse when you pass away.
There is a cost to those options. The 25% option will cost you 5% of your pension every year. The 50% option will cost you 10% of your pension annually.
And if you pick the “no survivor benefit” option, you need to keep this in mind: All this ties into federal health care. If you want your spouse to be able to continue receiving federal health care after you pass away, you can’t pick the “no survivor benefit option–unless your spouse is also a federal employee or retiree. (In that case, they would qualify for their own coverage.)
As you can see, if your spouse is not a federal worker, then oftentimes the “no survivor benefit” option is neither a viable nor an attractive option.
Here again, life insurance can be a way to solve any sort of financial shortfall.
Those are four big questions you need to answer as you near federal retirement. (Obviously, there are many others than that–and not just having to do with vacations, grandkids, and pickleball!)